Calcutta High Court
Commissioner Of Income-Tax vs Woodcraft Products Ltd. on 15 June, 1992
Equivalent citations: [1996]217ITR862(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference at the instance of the Revenue, the following questions have been referred by the Tribunal to this court under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1976-77 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that medical expenses reimbursed should not be treated as perquisite for the purpose of disallowance under Section 40(c) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the disallowance of Rs. 1,32,484 being the travelling expenses incurred in connection with the exploration of possibilities of expansion of the assessee's business which did not take place ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting addition of Rs. 2,99,462 being the export subsidy and duty drawback accrued to the assessee but not accounted for in the accounts ?"
2. It is not in dispute that the first question is covered in favour of the assessee by the decision of this court in CIT v. Ashoka Marketing Ltd. [1990] 181 ITR 493. We, accordingly, answer the first question in the affirmative and in favour of the assessee.
3. As regards question No. 2, the facts admitted and/or found by the Tribunal are as under :
The assessee-company is engaged in the business of manufacturing and selling plywood. The assessee-company was exploring the possibility of expanding its business operation and setting up a saw-cum-plywood factory in Kenya with a view to expanding its existing business activity. The endeavour to set up the factory at Kenya was controlled and administered by the existing management of the assessee-company and the exploration was carried out by its existing employees. Travelling expenses were incurred in connection with the proposed expansion of the existing business of the assessee-company. Both the Commissioner of Income-tax (Appeals) as well as the Tribunal, following the decision of the Gujarat High Court in CIT v. Alembic Glass Industries Ltd. upheld the claim of the assessee-company. The findings of fact as recorded by the Commissioner of Income-tax (Appeals) as well as by the Tribunal have not been challenged by the Revenue. Learned counsel, appearing for the Revenue, drew our attention to the decision of this court in Indian Oxygen Ltd. v. CIT [1987] 164 ITR 466. In this case, this court held that travelling expenses incurred in contemplation of a new project and new lines of manufacture to be undertaken in future were not deductible since the expenditure had no relation whatsoever with the existing business which was being carried on by the assessee. This court held that the expenses incurred for the purpose of launching a new project or initiating a new line of business, separate from the existing business, cannot be held to be a revenue expenditure incurred in connection with the existing business. This case is clearly distinguishable in view of the findings of fact recorded by the Commissioner of Income-tax (Appeals) as well as by the Tribunal in the case of the assessee-company. The assessee, in this case, is already engaged in the business of manufacturing and selling plywood. The travelling expenses were incurred in connection with the expansion scheme of the assessee-company to set up a new plywood factory at Kenya under the same management with common administration and control. This was not a case of a new business, separate and distinct from the existing business.
4. In the decision of this court in Indian Oxygen Ltd. v. CIT [1987] 164 ITR 466, it was clearly indicated that the question of disallowance of the travelling allowance arises only in a case where the expenditure was incurred in contemplation of setting up new lines of business of manufacture. In that case, the travelling expenses being incurred to explore the possibility of setting up a project for a new line of business of manufacture, the decision had to be against the assessee. It is, however, tacit in the said judgment that if the expenses were incurred merely for the expansion of the existing lines of business carried on by the assessee, the same would have been an allowable revenue deduction. Therefore, following the fundamental principle underlying the decision of this court in Indian Oxygen Ltd. v. CIT [1987] 164 ITR 466, we hold that the expenditure in this case has to be accepted as a revenue deduction because the expenditure has direct nexus with the existing business carried on by the assessee. That the travelling expenses were incurred for the purpose of the expansion of the same business of manufacture of plywood which the assessee had been carrying on, is not challenged. It is an undisputed fact.
5. In more or less the same situation, the Gujarat High Court in CIT v. Alembic Glass Industries Ltd. held that where a new unit is set up by the assessee for manufacture of the same product at a different place, the new unit is an integral part of the existing business and is the same business as the former one. Of course, the facts in that case were slightly more complicated. There, the assessee, a manufacturer of glass at Baroda established a new manufacturing unit at Bangalore which was yet to go into production during the assessment years involved in that case. The Revenue contested the assessee's claim for deduction of the interest on the funds borrowed for the purpose of setting up the unit at Bangalore on the ground that such interest was pre-operational expenditure calling for capitalisation as part of the capital outlay. The Gujarat High Court, however, held that the new unit being an integral part of the existing unit, the interest on borrowing has to be attributed to the totality of the assessee's business and not specifically attributable to the new unit set-up by way of expansion of the existing business because of the unity of the two units forming one business. No part of the expenditure by way of interest was divisible and earmarked as capital expenditure for the new unit that had not till then gone into production. The ultimate fact remains that the borrowing was for the purpose of a business which was a going one.
6. In this case before us, the expenditure is also for the expansion of the existing business, though the object of manufacture, in contemplation of which the expenditure was incurred, did not materialise. May be, the expenditure is abortive but its character as a revenue expenditure incurred for the purpose of the expansion of the existing business is not disputable and has not been disputed either. In the premises, the second question is answered in the affirmative and in favour of the assessee.
7. So far as the third question is concerned, it appears that the export subsidy is being accounted for and offered for taxation by the assessee-company year after year on cash basis. Admittedly, all along the assessee-company has been taxed on cash basis in respect of export subsidy and duty drawback. In that view of the matter and since the assessee has been consistently following the cash method of accounting for export subsidy and duty drawback, we answer the third question in the affirmative and in favour of the assessee. There will be no order as to costs.
Shyamal Kumar Sen , J.
8. I agree.